Generic Questions Flashcards
What three things should you consider as first steps before undertaking a valuation?
Your professional competence to undertake the valuation, your independence (No COI) and Terms of Engagement.
How do you calculate WAULT?
Add all contracted rental income on the portfolio between now and the time the leases expire, then divide it by the sum of the contract. Expressed in number of years.
Describe the timeline of a typical valuation instruction.
**Start: **
Receive opportunity to quote, Check competence, Check COI, Draft terms of engagement (scope of works, fee, PII, CHP), Receive countersigned terms.
**Due Diligence:
Valuation & Reporting:
Completion: **
Undertake statutory DD (rates, flood risk, planning, EPC), Gather information – leases, title, planning docs, OS plans, Inspect and measure, Research market / analyse comps.
**Due Diligence:
Valuation & Reporting:
Completion: **
Undertake valuation, Peer review, Draft report, Finalise and sign report, Report to your client.
**Due Diligence:
Valuation & Reporting:
Completion: **
Issue invoice, Ensure filing in good order for audit.
What are the 5 methods of valuation?
- Comparable
- Investment
- Profit
- Residual
- Depreciation Replacement Cost
Describe the methodology behind using the comparable method.
- Search and select comparables
- Verify information using a triangulated approach
- Produce a schedule
- Adjust comparables according to the hierarchy of evidence
- Analyse comparable evidence
- Form opinion
- Report value and prepare file note
What is the hierarchy of evidence when considering leasing deals?
- Open market lettings
- Lease renewals
- Rent review
- Third Party determinations
- Sale and leasebacks
- Inter-company transactions
Why is a lease renewal better?
Lease renewals are done as an open market letting. Rent reviews are upwards only, no ability to leave so less negotiation, other terms not negotiable, might be CPI linked review.
What did the RICS publish in relation to valuation and the use of comparable evidence?
RICS Guidance Note on Comparable Evidence in Real Estate Valuation 2019.
Describe the Traditional Investment Method of Valuation.
Income stream (market rent) is capitalised at a yield. Growth is implicit.
What is the formula for calculating present value?
Future Value / (1+discount rate)^time.
What is the formula for YP for a term?
1-Present value / discount rate or interest rate.
What is a term and reversion valuation?
Used for reversionary assets (when the ERV is greater than the passing).
* Term is valued until the break / review at initial yield.
* The reversion capitalised into perpetuity at the reversionary yield.
What method of valuation do you use when a property is overrented?
Layer and Hardcore Method.
* Apply a froth rate to the over rented section.
* Higher yield reflects greater risk on rent.
Define Equivalent Yield.
Time weighted average yield between net initial and reversionary yield.
Define Nominal Yield.
Initial yield assuming rent is paid in arrears.
Define True Yield.
Assumes rent is paid in advance, most traditional rent assumes that rent is paid in arrears.
Define NPV.
Net present value = sum of all discounted cash flows of the project. Used to determine viability of an investment given a certain level of desired return.
Define IRR.
Internal Rate of return. The rate at which all future cashflows must be discounted to produce an NPV of 0.
When is the Profits method of valuation used and how does it work?
Used to value property on the basis of a business / trading potential.
* Commonly for the valuation of care homes and hotels, pubs, petrol station properties.
* Value is determined by the profitability of the operation within the asset.
* Annual turnover less costs less reasonable working expenses less operator’s remuneration = FMOP.
* Aka the EBITDA capitalised at appropriate yield (YP) to achieve market value.
How many years of audited accounts would you ideally like to see for a Profits Method Valuation?
3 years.
What is the difference between a development appraisal and residual valuation?
A development appraisal assesses the viability of a project for a developer. Assumes site value or calculates it based on profit requirements. A residual valuation looks to the market to appraise the value of a piece of development land. A residual valuation is a one moment in time for a specific purpose.
What are the formulas for these?
Profit:
* GDV – Costs – Fixed Land Price.
Land Value:
* GDV – Costs – Profit.
When should you use the depreciated replacement cost method of valuation?
It should be used when there is limited availability of market evidence.
It is calculated:
* Value of land, with existing use planning permission in place,
* Cost of replacing the building, with allowance for depreciation (BCIS).
What are three types of obsolescence?
Physical, functional, economical.
What must a valuer include when reporting a DRC valuation?
State the value for any readily identifiable alternative use if it is higher than the current use if appropriate. If appropriate, a statement that the market value would be lower on cessation of the business use.
Can you undertake a re-valuation of a property without re-inspection?
In accordance with VPS2 of the red book, you can revalue a property without reinspection providing you as the valuer are satisfied there has been no material change that will impact the property’s value.
* This should be stated in the Terms of Engagement and in the report.
What does VPS3 say that a Valuation Report should contain?
- Identification and status of valuer
- Identification of client
- Identification of the asset
- Purpose of valuation
- Bases of value adopted
- Valuation date
- Extent of investigation
- Nature and sources of information relied upon
- Assumptions and special assumptions
- Restrictions on use
- Confirmation that the valuation has been undertaken in accordance with IVS
- Valuation approach and reasoning
- Amount of valuation or valuations
- Date of valuation report
- Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on part of the valuation user
- Statement setting out any limitations on liability that have been agreed.
Does a valuer have to sign a valuation report?
Yes according to VPS 3. Make it clear that they objectively able to value the property. Signed off by an individual, not a firm.
What is the definition of Investment Value?
The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.
What is an assumption?
An assumption is made where it is reasonable for the valuer to accept that something is true without need for specific investigation or verification.
When must special assumptions and marketing constraints be agreed?
Special assumptions and marketing constraints must be agreed with the client prior to undertaking the valuation and Global Red Book states
If the valuer and Client make arrangements to manage a potential conflict of interest, where should these arrangements be recorded?
Recorded in the terms of engagement and in the valuation report.
What is the Purpose of the New UK National Supplement?
It is not a substitute, it augments the Red Book.
Are valuations for secured lending purposes regulated purpose valuations?
Secured lending valuations are NOT regulated purpose valuations as they are not relied upon by a third party or in the public interest.
What does it mean to be subject to ‘Valuation Monitoring’?
Inspections by the RICS professional regulation team take place.
• Annual declaration from the member valuing detailing the length of time that they have been valuing for that client.
• Whether that client accounts for more of less than 5% their income.
If your firm introduces the property or receives an acquisition fee for the purchase of the property, according to UK VPS3, how many months have to pass before you can value it for regulated purposes?
12 months.
What do you have to consider when valuing a charity in the UK?
Follow the requirements of the 2022 Charities Act. Guidance from the RICS is provided in UK VPGA 8.
• A surveyor would comment as to whether it would be in the best interest of the charity to buy/sell.
What must you consider when valuing a leasehold property?
Capitalise net rent (after ground rent reductions).
• Make appropriate adjustments to the yield for any increased risk associated with leasehold.
• A DCF might be used for depreciating asset.
• Rent – ground = net rental income.
What is a ransom strip and how might the valuation of a ransom strip be approached?
Piece of land that enables access to a development site. Typical valuation could be 15% to 50% of the development value unlocked (i.e. the uplift).
How do you calculate SDLT for commercial property?
There is a banded system with the following rates:
* Up to £150k – 0%
* £150k to 250k – 2%
* Over £250k – 5%.
Check
SDLT is also payable on the grant of new leases, how is it calculated for commercial property?
It is calculated by taking the NPV of the lease and applying it with the following bands:
* Up to £150k - 0%
* £150k to £5 million – 1%
* Over £5 million – 2%.
* Break clauses excluded from the valuation.
Check
What is unique about the valuation technique used for a high street retail unit?
You use the method of zoning, halving back, recording the rent in terms of zone A. 20 ft zones.
What is this for prime London, Belfast, Scottish streets?
30 ft zones.
How do you calculate a net effective rent from a headline rent?
You make deductions for rent free.
After how many years does right to light arise?
After 20 years of enjoying uninterrupted natural light.
What are the 3 aims of the RICS Valuer Registration Scheme?
- Improve the quality of valuations and professional standards
- Meet the RICS’ requirements to self-regulate
- To protect and raise the status of the valuation profession.
When did the RICS Valuer Registration Scheme start and who is it for?
Scheme started in 2011, for valuers who regularly undertake red book valuations.
Can you tell me about loan terms for loan security?
I cannot reveal loan terms to protect Client’s financial information. I did have regard to it so as to assess the suitability of the asset as a security.
What is your company’s liability cap for valuations?
Generally, lower of 33% of the value or £75 million.
Why do we conduct due diligence?
To see if anything might impact the overall value.
What is minimum eaves height on industrial?
8m, site coverage 40%.
• Steel portal frame
• Profile sheet cladding – cut edge erosion. Steel starts to erode.
What is Net Yield?
Yield adjusted for purchasers costs. End value.
What is years purchase?
Amount of years it would take the income to pay off the capital value.
What is gross yield?
Yield not adjusted for purchaser costs.
What is YP?
Value/income = YP.
What is an all risks yield?
Rate of interest that reflects all risks associated with the property.
What is the maximum uninsured excess sum?
Minimum coverage: Up to £10 million the greater of 2.5% up to £10,000.
* Over £10 million – no set limit.
Check
How might a fee be calculated?
Depends on the complexity of the property:
• Time taken to gather evidence and produce report
• How much liability is on the line and bases of value
• Therefore influencing the liability cap.
How is your equivalent yield adjusted from the index?
The EY assumes a unit outside of London on a 10 year term, therefore I had to account for the fact that this unit has 3.5 year term and in London.
When would you use the net initial yield approach?
When it is rack-rented, let to a good covenant on a long unexpired term, with no major shocks like a break.
What is the hardcore and layer method?
• Split your income horizontally
• Bottom slice = Market rent
• Top slice = rent passing – market rent with a higher yield on top slice to reflect your additional risk.
What is the legally acceptable Margin of Error in Property Valuation?
An acceptable margin of error is +/- 5% for single residential properties, +/- 10% for single commercial properties, and +/- 15% for more complex holdings.
What did Singer & Friedlander Ltd. v J D Wood (1977) establish?
For relatively simple valuations, there is a smaller margin for error; for more complicated valuations, a greater margin of error is acceptable.
